Arizona Court of Appeals Overturns Mall Subsidy

Published April 1, 2009

Christmas is long over for retailers in Phoenix, Arizona. But for one shopping mall developer, it ended before it even began.

‘Twas the night before Christmas Eve when the Arizona Court of Appeals struck down a $97.4 million subsidy for the developer of a luxury shopping mall called CityNorth. The case, Turken v. Gordon, may be appealed to the Arizona Supreme Court.

Under the subsidy agreement, the City of Phoenix was to give half the sales taxes collected at CityNorth, for up to 11 years and 3 months or $97.4 million, to its Chicago-based developer, Thomas J. Klutznick Company. In exchange the developer would provide 2,980 of its 14,683 parking spaces at the mall free for customers, employees, and anyone else to use. The developer provides the rest of its parking spaces for free too, however, just as in other shopping malls in Arizona.

The developer also would have provided 200 “park and ride” spaces for carpool and public transit riders, but those spaces were not part of the legal challenge.

Business Owners, Senator Sue

The lawsuit was filed by the Phoenix-based Goldwater Institute’s Scharf-Norton Center for Constitutional Litigation in August 2007, a month after the deal was signed. The plaintiffs are six small business owners and taxpayers in Phoenix who do not receive subsidies, including state Sen. Ken Cheuvront (D-Phoenix). The National Federation of Independent Business filed a brief in support.

The Goldwater Institute’s primary claim was made under the Gift Clause, a provision in the Arizona Constitution prohibiting the state and local governments from subsidizing private individuals and corporations. The Court of Appeals unanimously agreed, writing, “We think these payments are exactly what the Gift Clause was intended to prohibit.”

The decision reversed the trial court ruling, which had upheld the deal.

The CityNorth subsidy was offered as an incentive for the mall to be built in Phoenix as opposed to neighboring Scottsdale. The developer projected economic losses, and the subsidy was intended to make up for the shortfall. In agreeing to the subsidy, the Phoenix City Council took the developer’s word over that of its own consultant, who found the developer was significantly overstating the potential losses.

600 Percent ‘Error’

After the lawsuit was filed, it was revealed the developer’s economist had made a computation error and overestimated by 600 percent the figure provided to the council.

Even so, Phoenix Mayor Phil Gordon told the Phoenix New Times he did not “regret the decision.” He voted for the subsidy even though three years earlier he had warned retailers need to learn there is no “constitutional right to drink at the public trough.”

Conversely, the unsuccessful 2007 mayoral challenger, Steve Lory, foreshadowed the Court of Appeals opinion, saying in a television interview, “The bottom line is that it is a giveaway.”

Phoenix Councilwoman Peggy Neely pushed for the deal; the mall is in her district. Only Councilmen Tom Simplot and Greg Stanton voted against it.

Maria Baier was elected to the council after the deal was signed but said during her campaign (after the lawsuit was filed) she would not have voted for it. She was endorsed by Mayor Gordon. Another newly elected council member, Michael Nowakowski, also said he would not have voted for the subsidy.

‘Stop this Madness’

State Rep. Russell Pearce (R-Mesa) told the Associated Press, “It’s absolutely critical … that we stop this kind of madness. Hundreds of millions of dollars in giveaways, it needs to stop.” Gilbert Mayor Steve Berman, Tempe Mayor Hugh Hallman, and Scottsdale Mayor Jim Lane also have spoken out against retail tax subsidies.

Mesa Councilman Rex Griswold disagrees. He told the East Valley Tribune, “Most of them have been pretty good business decisions.”

The Goldwater Institute argues subsidizing select private developers using taxpayer dollars is never a good decision and is not fair or constitutional. Goldwater attorney Clint Bolick, who represents the plaintiffs, called for Phoenix “not to throw good money after bad” and urged the council not to appeal the case to the Arizona Supreme Court. The deadline for the city to decide was February 23.

Carrie Ann Sitren ([email protected]) is an attorney with the Goldwater Institute’s Scharf-Norton Center for Constitutional Litigation in Phoenix, Arizona.